Does the clothesline paradox apply to IT?

Does the clothesline paradox apply to information technology? There is a relationship between the clothesline paradox and digital dark matter, but there is also a subtle and important difference. It is important to keep those differences straight. It makes a difference to several contemporary policy debates.

If you take down your clothes line and buy an electric clothes dryer the electric consumption of the nation rises slightly. If you go in the other direction and remove the electric clothes dryer and install a clothesline the consumption of electricity drops slightly, but there is no credit given anywhere on the charts and graphs to solar energy which is now drying the clothes.

In other words, standard approaches to economic measurement do not count inputs that lack a price. The clothesline paradox leads to under-counting the importance of activity that uses free endowments from nature. It is one of the quirks of modern economic measurement. No price equals no value.

Why does that matter? For one, out of sight leads to out of mind. The sun does not have a firm that lobbies on its behalf. Policy conversation tends to favor existing firms with seemingly big economic contributions, and tends to underestimate the importance of the free.

Perhaps more importantly, when a new technology (which uses the free inputs) substitutes for existing economic activity, on first glance it looks like the new technology brings about a decline in total economic activity. That appearance is misleading, of course, because the savings goes into other economic activity, but those gains are diffuse and difficult to identify.

A third aspect matters as well. An unpriced input tends to come without restrictions on use. There are very few laws governing the proper use of the sun. (Ok, there are a few zoning laws, actually, but you get my point).

This bothers Tim O’Reilly. Why? He argues that open source software suffers from a clothesline paradox. Open source software is an input into one trillion dollars worth of activity, he estimates. Yet, because the open source is unpriced, it gets little or no credit.

Simon Phillips of InfoWorld liked this point, and gave a catchy label for the effect, calling open source software “The Stealth Stimulus Package.” Phillips goes on to compare the open source software and the clothesline paradox, arguing for their similarity.

There is a good insight there, but also an interesting oversight. The interesting insight is worth stressing. Open source software deserves credit, but there is more. This comparison reminds me of an old column in this space, one devoted to “digital dark matter.” Digital dark matter are “important building blocks of the digital economy that we do not measure using standard tools.” (Indeed, the first example of digital dark matter in that essay is open source, where the lack of price is the source of the issue.)

There is a key difference between using the sun and using open source software, however. Nobody has to invest in the sun in order to keep the light coming. Not so for some digital dark matter. Fail to invest, and stuff will not arise.

Even bigger, fail to invest and the private sector will not offer a substitute.

Why does that distinction matter? For one, when it is forgotten, it can lead to frightfully shallow economic insight. In particular, fail to get the open source out there, and unrestricted standards do not arise.That shapes the direction of innovation.

For example, consider the essential features of the Internet, such as the key protocols and standards. Also consider the key standards of the World Wide Web, not to mention the technical standards underlying WiFi. This stuff would not have arisen without lack of restrictions on standards.

Here is what happens if you do not understand the importance of the free input… you make absolutely fatuous arguments. For example, with the benefit of ideological blinders, and a dose of lack of detail, several commentators — most notably, the Wall Street Journal editorial page (which David Warsh nicely summarizes) — recently have begun to argue that government’s investment in the Internet was not essential to its growth. That conclusion arises due from the (again, frightfully) unstated assumption that the Internet would have turned out the same way without government sponsorship at the outset.

Look, somebody can only say such things if they do not know the history of the Internet, and they make a concerted effort not to know the facts. (If you are neophyte, there are many places to start online, but I recommend starting here). There actually were attempts to make networking investments with private firms, and there were privately funded packet switching firms too. Those did not catch on widely, and they remained a niche service. I repeat: Attempts to build a private national packet switching network of the scale and size of the Internet failed to catch on. And it is very clear why it failed: because they were restricted to proprietary interconnection, with restricted rights to users and other firms. Nobody interconnected with anyone else.

But everyone would interconnect with the government sponsored Internet. It came out of universities, who took over funding for network development from the Department of Defense (who originally got into the business because DOD needed better computing for their own purposes). The standards coming from universities were not proprietary. That is actually why it worked.

Summarizing, when we talk about unpriced inputs, let’s be careful about recognizing both the amount and direction of investment. An unpriced input does tend to get used more than a priced one, and it does tend to get less credit. More than merely the price matters, however. If it takes investment to maintain and grow, then somebody has to actively make that effort. After the investment arises, and what restrictions are placed on it — that matters a great deal for how it gets used.